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Tuesday, September 22, 2009

What can we do?

Who knows? There are many points of view on this, of course. There are also many who would claim to know why we have a problem and who caused it. The truth is, however, that this has been a problem that has been developing for a very long time. To the extent that Figure 2 can be read accurately it would seem that the economy has been stagnant for 25 years, while Figure 1 would suggest that the rot started in 1987 (although I suspect that a longer data sequence would show a longer trend of deterioration). One could argue that it was the result of Muldoon’s National Government’s ‘Think Big’ strategy. Another argument could say that ‘Think Big’ was working and it was Lange’s Labour Government that did the damage. Another point of view could say that we never recovered from the 1987 stock market crash. Against all these arguments is that these events were many years ago, with many different governments and political philosophies since then. There must be something more fundamentally wrong!For my part I think the problem is comparatively simple. We don’t have any more economic resources to develop!Adjusting New Zealand to a level of equilibrium where productivity pays for consumption at relatively good levels of average wealth is not going to be easy. For a start we’re not sure what the problem is and we’re already beholden to a significant amount of foreign call on our capital. One thing is sure, this is a complex problem and the solution will be complex. We can be sure that there will be a solution though. The current situation is unsustainable and will change eventually. The question will become how much pain will we suffer?For my part I think halting population growth (through reduced immigration) would be a start. We could reduce population by this method as well but we might find that the foreign investment position doesn’t unwind, which would make things worse.Beyond that I think we need to better understand the problem, which is going to require a far better understanding of the fundamentals than we seem to have; and, to be frank, perhaps a little more honesty in our public debate as well. Ultimately solving the problem is going to require some real political courage. Maybe we really are in trouble.